Balancing Supply & Demand in Manufacturing
Balancing Supply & Demand in Manufacturing
Supply & Demand – a tale as old as industrialization itself. The former driven by producers, the latter by consumers. Every business is subject to the supply and demand paradigm, but manufacturing organizations in particular, since they determine the supply side of the equation. When we talk about “demand,” we are talking about the quantity of a specific good or service that consumers are willing and able to purchase during a given period of time. When we talk about “supply,” we are talking about the quantity of that specific good or service that is available to consumers.
The relationship between supply and demand for a good represents a very important agreement between its producers and consumers. In equilibrium, the quantity of a good supplied should equal the quantity demanded. This is the continuous aim of every manufacturing enterprise: to accurately determine and balance the demand for a product with its supply, thus meeting the needs of the consumer market and maximizing business revenues at the same time.
Despite its decisive impact on the business, however, alignment of demand and supply remains a major pain point for many manufacturers today. If demand exceeds supply, this leads to understocking and lost sales opportunities. If supply exceeds demand, this leads to overstocking and excessive inventory costs.
From the Sales perspective, understocking means:
- Missing sales targets
- Not being able to earn bonuses
- Empty shelves at retailer stores and lost sales
- Penalty costs incurred from contractual retailers
- Poor customer service and loss of customers
From the Supply Chain perspective, overstocking means:
- Limited space in warehouse, causing higher inventory holding costs
- Increased cost of rent if space is not enough to hold stock
- Increased risk of product obsolescence if shelf life is limited
- Having to offer discounts to clear excess stock, impacting profitability
- Higher labor costs to manage the excess stock on a regular basis
What is Sales & Operations Planning (S&OP)?
So, how can manufacturers find a balance that satisfies the need to both sell as much as possible without incurring the costs of holding excess stock of their products? The answer is simple: Sales & Operations Planning (S&OP). Sales & Operations Planning is an enterprise-wide integrated management process that seeks to align each business function to the goal of balancing demand and supply and achieving profitability. It is an executive statement of desired business output based on recommendations of the various departments, including Sales, Marketing, Planning, Finance, Procurement, Manufacturing and Supply Chain.
Digitalizing Sales & Operations Planning
Because the way in which a company manage its Sales & Operations Planning process can have a big impact on the productivity and profitability of the business as a whole, many smart manufacturers today are turning to technology to help them better control, oversee, synchronize and optimize their Sales & Operations Planning, from start to finish. Successful S&OP software applications include and connect a multitude of functionalities, including:
- Demand Forecasting & Planning
- Inventory Planning
- Production Planning & Scheduling
- Supply Chain Planning
Demand Forecasting & Planning
Departments Involved: Demand Planning, Sales, Marketing
Inputs: Historical Sales Data, Sales Budget, Market Trends
Output: Consensus Forecast
Demand Forecasting is the estimate of expected customer demand based on historical sales data. Demand Forecasting sets the push processes of supply chain management in motion, including raw material planning, material purchasing and logistical planning. Demand Forecasting sets the baseline for Demand Planning, which involves all the manual activities performed by demand planners to reach a consensus forecast. Successful solutions for Demand Forecasting and Demand Planning enable and facilitate the following activities:
- Automatic calculation of base demand forecast
- Selection of best algorithm to calculate forecast for every item
- Promotional planning
- Causal demand forecasting
- Multi-level demand forecasting (regional, distribution center, customer, location, product)
- Consensus demand forecasting
Inventory Planning
Departments Involved: Production Planning, Purchasing, Logistics
Inputs: Consensus Forecast, Customer Orders, Inventory Policies, Inventory Levels
Output: Replenishment Plan
Inventory Planning uses advanced modeling techniques to help manufacturers balance product inventory and costs against customer service level goals. Having an inventory that is too lean puts the enterprise at risk of missing customer service targets; having an excessive inventory reserve puts the enterprise at risk of excessive costs and waste. Inventory Planning solutions help to find the ideal balance. Successful solutions for Inventory Planning enable and facilitate the following activities:
- Time-phased safety stock calculation (monthly, weekly)
- Distribution resource planning
- Vendor-managed inventory planning
- “Just-in-time” planning
- Economic order quantity calculation
- Stock replenishment planning
Supply Chain Planning
Departments Involved: Supply Chain Planning, Production Planning
Inputs: Replenishment Plan, Stock Levels, Bill of Materials, Production Constraints
Outputs: Purchasing Plan, Production Plan
Supply Chain Planning solutions leverage Digital Twin simulation modeling capabilities to map an enterprise’s supply chain network and automate capacity and fulfillment decisions. When your supply chain matches your most profitable options with the lowest-cost ways to satisfy requirements, you can accelerate your progress towards profitability goals. Successful solutions for Supply Chain Planning enable and facilitate the following activities:
- Production planning
- Detailed production scheduling
- Supplier planning
- Raw materials planning
- Procurement optimization
Engineering’s Advantage
Sales & Operations Planning aims to bring order to the chaos of the marketplace. It enables manufacturers to be proactive, rather than reactive, to changes in the business environment. While many organizations continue to manage their Sales & Operations Planning activities in a disorganized and disjointed way, many others are turning to digitalization and seeing significant transformation and benefits as a result.
Successful solutions for S&OP result in:
- Higher levels of customer service
- Optimized inventory levels
- Higher manufacturing efficiency
- Improved collaboration across the organization
- Maximized sales revenues
With a global practice and team of resources dedicated to Sales & Operations Planning for Industry 4.0, Engineering is one of the few companies in the world with the business process knowledge, technical expertise and implementation experience needed to streamline, synchronize and optimize even the most complex and unpredictable supply chains for customers across all industrial sectors worldwide.
